Charles Gragg v. United States

In the 1980s and 1990s, Congress substantially amended the Internal Revenue Code (I.R.C.) to curb widespread abuses of tax loopholes. One newly added provision, I.R.C. § 469, restricted taxpayers’ ability to reduce their taxable income using passive rental losses' — that is, losses from rental properties they own but in which they do not materially participate. This case requires us to determine the scope of § 469. Specifically, it requires us to determine whether § 469 entitles real estate professionals like petitioner Delores Gragg to deduct rental losses without showing material participation in the rental property. We hold that it does not. Section 469 allows real estate professionals to deduct rental losses from their taxable income, but only if they materially participate in rental activities.

I.

In 1986, Congress passed the Tax Reform Act of 1986 to curb taxpayers’ deduction of losses from so-called “passive” investments. Tax Reform Act of 1986, Pub. L. No. 99-514, § 501 (a), 100 Stat. 2085 , 2233 (codified as amended at I.R.C. § 469). It implemented a simple rule: taxpayers could not reduce the taxable portion of their true income with investment losses unless…